Question

In: Economics

Explain the controversy surrounding the use of credit scores as a rating factor in homeowners insurance.

Explain the controversy surrounding the use of credit scores as a rating factor in homeowners insurance. Please articulate 1) the insurer’s perspective and 2) consumer advocates’ perspective

Solutions

Expert Solution

Insurance is a legal agreement by which a company provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium. The purpose of risk is to protect the uncertain finacial loss in the future. Principle of indeminty is apply in general insurance but its not apply in life insurance. Risk play an important role in insurance and a adverse selection can increase the risk for an insurance company. So, before securing the risk/loss/damge a compnay properly analyze the risk through underwriting. Insurance underwriting is a way to evaluate and analyze the risks involved in insuring people and assets. After analyzing the risk the company take decision for providing or not insurance cover and if provide then what will be cost (premium) for the insured.  Credit-based insurance scores use to analyze the person's credit history and credit worthiness to predict how likely they are to have an insurance loss. Insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge adequate and right premium as per the actual risk. As per the insurer credit based insurance scores help in diversification of risk for insurer and help in stop taking the wrong advantages by the high risk people. Its help to the insurer to adjusting their premium according to amount of risk.

But other side the customers are not happy with it because most of the customers do not understand the complexcity of the credit based insurance. They do not understand the logic behind it and tell that its not allign with insurance priciples. They also appose it because a poor section of the society which have not credit score or have lower credit score could harm  because of it. So, its against of social justic.


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